No matter which situation you find yourself in, it's a good idea to have the working arrangement spelled out in writing. In some states, working relationships require a written contract. In other states, a written contract is highly recommended because of unique worker compensation laws and a desire to protect worker rights. A contract can also provide a basis for income tax status, which may be to the instructor's benefit or detriment depending on the contract's contents.
What then should an instructor look for (or request) in a contract for his services? Each work situation requires a focus on different points. In most cases, when an instructor becomes an employee of a school or club, the school will offer some sort of written document or contract. This document may include an explanation of the instructor's duties, responsibilities, and work schedule; and it outlines the school's basic policies and procedures.
The school pays the CFI a salary, which may be a set amount, an amount based on hours worked, or some other payment schedule. The school withholds taxes, workers' compensation, unemployment insurance, and other miscellaneous deductions from each paycheck. Anyone who ever collected an employee paycheck knows these deductions can quickly deplete their take-home pay.
If a CFI is an employee of a school or club, the IRS and state taxing and labor authorities aren't concerned about the contents of the instructor's contract. The IRS doesn't require a written contract, and many states don't either. What these authorities care about is whether the school withholds the correct amount from the employee's paychecks, whether the school has contributed its correct amount, whether those combined amounts have been deposited in the proper accounts, and whether the school has procured and maintained proper labor insurance.
Once a CFI has determined that he (or she) is an employee - and not a contractor - the CFI should make sure his employment contract contains (or does not contain) other important clauses. In other words, the CFI must carefully scrutinize his contract for possible pitfalls or terms that may cause him problems down the road.
For example, a good employee contract says the CFI will be regarded as an employee of the company and states in simple but complete terms how the school will compensate the instructor. If you have questions about pay after reading the contract, and possibly discussing it with others, the contract is probably too ambiguous.
Does the contract require you to bring a certain number of new students to the school? Does it explain an order of seniority that determines how the school assigns new students to individual instructors? Does it describe the expected or required work schedule? If a contract is silent on these matters it doesn't mean the contract is bad, but it does suggest that you may need to discuss these issues before accepting the job and signing the contract.
One major area of contention in an employment contract is the term of employment. Does the contract require the instructor to stay with the school or club for a defined amount of time such as one year? What happens if the instructor gets an airline job and leaves before the term is up? Does the contract require the CFI to reimburse the school for expenses?
A good and reputable employer will not punish an instructor for advancing his career, but it's not unreasonable for a school to ask for reimbursement of specialized, out-of-pocket instructor training expenses if the instructor leaves prematurely. Most smaller flying clubs and Part 141 schools don't require reimbursement for such things as initial CFI check-outs with the chief pilot.
Another area of concern is the non-competition clause. State laws vary widely on this. How does the contract treat the CFI if he leaves the school or club, takes a job at another school in the area, and his students follow him to the new school? Most employment contracts have clauses that attempt to prohibit an instructor from practicing their trade at a competing school, but state laws tend to be very specific about the requirements of such clauses.
Once again, reputable schools understand that circumstances may arise that require a CFI to change training environments. Many times students will freely choose to follow the instructor to the new school because they don't want to change CFIs in the middle of training or for other reasons. A CFI would do well to scrutinize a contract carefully regarding non-competition clauses because they can cause unintended trouble.
On the other hand, many flight schools and flying clubs don't employ or hire CFIs. They prefer to treat instructors as independent contractors, and this arrangement can have economic benefits for both school and instructor. But before a school can legitimately use independent contractors, it must jump through a few hoops.
The contract is one, but not the only, important element of a valid independent contractor relationship. Many schools and clubs mistakenly believe that the mere existence of a contract describing a CFI as a contractor assures unassailable independent contractor status with both state and federal authorities. This is clearly not the case, and voluminous case law exists to prove it. Likewise, the absence of a written document generally will not settle the question.
But official agencies do give some weight to the written contract between a school and an instructor. In some circumstances, a poorly drafted contract may even tip the scales one way or the other, depending on its contents. That is, considering the total circumstances of the relationship between the school and the instructor, the contract's language may cause agencies to classify an instructor as an employee, rather than an independent contractor, for tax and workers' compensation purposes. Sometimes contract language is the smoking gun that taxing authorities look for when trying to determine the true nature of the work relationship.
If either the school or instructor seeks independent contractor status, the contract should contain certain elements. If properly drafted, independent contractor contracts differ significantly from employee contracts.
The contractor's contract should spell out that the CFI has the right to control and direct his own work in the manner he sees fit, not only as to the result accomplished, but the methods used to accomplish it. The contract should allow the instructor to set his own schedule, but it can include general hours during which the instructor may use the school's facilities, simulators, and aircraft. The contract should indicate that the school doesn't pay the CFI a salary - students pay the instructor directly, even if student payments are run through the school's account.
The contract should not attempt to place general restrictions on the instructor in any way. Under no circumstances should the contract say the instructor can work only for that particular school. If the IRS discovers contract language like this, you can plan on going down in flames along with the school. This restriction is specifically forbidden in a valid independent contractor arrangement (but it's perfectly valid in an employee agreement). In fact, disgruntled instructors who have been subject to this restriction can file Form SS-8 with the IRS, and be guaranteed that an audit of the school will soon follow.
An instructor who is an independent contractor should not sign a working agreement that contains this sort of language. In addition, the contract should definitively state that the instructor is responsible for paying his own taxes and ensuring his own compliance with workers' compensation laws.
If an instructor chooses not to associate with a particular school or flying club, and advertises his services to the general public, he may consider having each student sign a short and simple agreement for flight training services. The agreement could explain the scope of the services, describe a payment schedule, and state that the CFI is not the student's employee.
Because independent, unaffiliated instructors often have agreements with FBOs or flying clubs to use their aircraft, the CFI could also have a simple agreement with the FBO or club stating that he (or she) is not an employee. However, it is uncommon for freelance instructors to use contracts for services, and it wouldn't be difficult to prove true contractor status in this case. So, while a written agreement is nice, it's probably not required in the majority of freelance CFI circumstances.
In Summary
Here are the general points CFIs should keep in mind regarding employment status:
1. It is better to have a written contract than not.
2. The contract should spell out working status - employee or independent contractor.
3. The contract should not be ambiguous.
4. Beware of non-competition clauses; they will usually bite the instructor.
5. Beware of restrictions on working elsewhere if a school regards you as an independent contractor.
